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In 2010, legislation was enacted in New York and Rhode Island to tax the sale of affiliate products. The legislation, widely known as the Amazon Tax, Affiliate Nexus Tax, Affiliate Program Tax, or Sales and Use Tax, requires that an affiliate provider pay state sales tax on items sold by their affiliates, whether or not they directly operate in the state. The tax law effectively assumes that the presence of an affiliate in another state translates into the affiliate provider operating as a business in that state. In other words, the business has nexus (is affiliated with) that state. The affiliate program tax is being disputed by companies such as Amazon, Overstock, Blue Nile, and others that offer affiliate programs.
What is an Affiliate Program?
An affiliate program is a program that offers commissions and incentives to sellers that sell other people’s products or services. For example, Amazon pays you, as an Amazon Associate (their term for affiliate) a commission if you help sell their products. The commission structure varies, but typically the larger the affiliate provider (Amazon being one of the largest players in the game) the lower the commission. Smaller affiliate providers on networks such as CJ (Commission Junction), Clickbank, etc. – basically networks that bring small businesses and affiliate marketers together, tend to pay much higher commission rates. We’ve seen commissions that exceed 50%.
How Much $ Does Amazon.Com Make From Affiliates?
According to its Wikipedia page, Amazon.com has a whopping 40% of its revenues to thank to its affiliate marketers. So why on earth would they be shutting down entire states worth of affiliates? Because the hit from having to pay sales tax in every state would outweigh the loss of a few states worth of affiliate marketers. And of course, in the long run, they would be saving billions of tax dollars by winning. However, recently it looks like the legislation is inevitably heading in the direction of merchants having to charge sales tax based on the buyer’s residence, regardless of whether or not they operate a physical location in that state. Makes sense to us, since the physical retailers already suffer a disadvantage due to overhead costs associated with real estate, office rental, shelf space, floor staff, in store marketing and advertising materials, etc.
Why the Affiliate Nexus Tax Won’t Work
The problem with the current incarnation of the affiliate program tax is that it creates massive overhead, as well as effective double taxation, for affiliate companies. They pay sales tax on a sale you make, and then you pay income tax on the commission on that sale. In this economic climate, governments are using every tax they can to buff up their budgets. However, this is one they haven’t thought through. They are looking directly at the numbers they could be making, assuming all affiliate transactions are taxed. The problem is affiliate program providers, including Amazon, Overstock, and Blue Nile, will simply stop doing business in states that enact an affiliate program tax. In fact, Amazon, Overstock, Blue Nile and others have already closed the accounts of NC affiliates, in anticipation of the affiliate tax law passing.
Which States are Affected by the Affiliate Program Tax?
This can be most directly answered by looking at the response on Amazon’s Associate (Affiliate) sign-up page: Note: Residents of Arkansas, Colorado, Connecticut, Illinois, North Carolina or Rhode Island are not eligible to participate in the Associates program.
California and Hawaii affiliates, among other states, have succeeded in having the tax legislation vetoed and removed from the tax package. However, a bill with a similar tax clause could resurface in these states, and the issue applies to affiliate marketers everywhere, because the more states the affiliate tax law passes in, the more of a precedent will be set for other states.
Performance Marketing Alliance
Check out the Performance Marketing Association website for the latest updates on action taken against unconstitutional affiliate tax laws, and how you can help keep affiliate marketers in business in your state.
Below is an archive of material that we published during our fight against legislation before it passed in North Carolina in 2011.
[Archive of Fight Against NC Nexus Tax]
Below is an archive of materials we used in our battle to oppose nexus tax legislation in North Carolina, on behalf of a large contingent of affiliate marketers. Please visit the PMA website linked above for current actions you can take to help support affiliate marketing.
Make Yourself Heard!
It is vital that you make yourself heard, especially if you live in NC! We’ve already heard countless stories of small businesses who rely primarily on an affiliate stream of revenue, and that will be forced to leave the state if the affiliate program tax law passes. Don’t let your fellow affiliate marketers down! Contact your local Representatives (see this list of NC Representatives by county), as well as the NC Senators and the Governor, and let them know you oppose the sales/use tax nexus clause.
Template Letter to Send to Your Representatives
It’s also not a bad idea to email your representatives (some will in fact reply) and give them a phone call (we just spoke to one directly today). Here’s a template letter you can use:
As a fellow Democrat/ Republican, I supported you in the last election (only include this if it’s true). I run a [insert type of business] based in [insert your location in NC], and would like to express my concern for the pending “sales/use tax nexus clause” (on digital downloads and online purchases) that is being included in the tax plan. While I support a tax on online sales (you can omit this, but we feel the problem is not online sales tax in general, it’s the way this clause is implemented), I feel strongly that this particular tax clause is implemented in a way that will do more harm than good.
While New York does show an increase in online sales tax revenue from a similar law enacted last year, they have not yet published figures that will undoubtedly show a proportionately larger decrease in income tax revenue from affiliate businesses. Why? Because in almost all cases the commission percentage on an online sale from a merchant is higher than the sales tax charged.
But the real problem is how much this law hurts small NC businesses. Merchants simply discontinue business with affiliate businesses in states that are enacting this law. As a result, businesses take the hit, and since there is no longer an affiliate revenue stream to be taxed as income, the state takes a hit as well (less revenue from affiliate income tax). Even worse, businesses that rely solely on these referrals as a source of income will be forced to move out of state to continue business and to continue supporting their families.
I encourage you to take a look at this map of NC businesses affected by this affiliate program tax, and this online petition with over a thousand signatures (note: petition is no longer online). California and Hawaii have both realized that this law, while having the right intentions, will result in more harm than good in its current implementation. Please vote no against the “sales/use tax nexus clause” and help keep North Carolina affiliate marketers in business.
Affiliate Program Taxes On Deck In Many States
1.9.11 – Update – The tax is now being considered by Illinois legislatives. Illinois reportedly has 9,000 Amazon affiliates, which may cause Amazon to initiate a fight in that state. If not, we could see yet another affiliate business segment bite the dust.
The argument once again is that the absence of the law results in reduced tax revenue for the state ($169 million according to Illinois revenue officials), and retailers say that it gives online merchants an unfair 6.25% pricing advantage. What they’re missing here is that Amazon.com and other online merchants, when selling directly to state residents, do pay sales tax (based on shipping address). An affiliate marketer simply gives referrals to Amazon.com for particular products. They are therefore not directly acting as a sales agent, in our opinion. Therefore, we feel the affiliate or Amazon tax is unjust. Speak to your representatives today to help fight the affiliate tax in your state and prevent thousands of affiliates from going out of business.
8.29.09 – Update – Help us repeal this law by writing the Budget Reform and Accountability Commission. Here’s a sample template we used to help give you an idea of what to write:
Template For BRAC – Help Us Repeal The Affiliate Tax!
The sales/use tax clause in the last budget package, taxing online sales from merchants that have affiliates in NC, is having an unintended side effect. Merchants are using NC affiliates as lobbying fodder by closing NC affiliate accounts. This is detrimental to thousands of small NC businesses running affiliate programs. Those relying solely on affiliate revenue are being forced to move out of state. As a result, NC will be making less income tax, offsetting the potential gain in sales tax. Not to mention the loss of hundreds of small businesses. I support online sales tax, but not in this way. Please consider repealing the sales/use tax clause from the budget package until an approach can be taken that won’t be so detrimental to NC businesses.
[Your name, credentials, and contact info]
Response From BRAC
Here’s the automated response you’ll get as confirmation that your email was sent:
All ideas will be reviewed. Some may be forwarded directly to agencies for further research and others may become part of the BRAC agenda.
Thank you for your submission to the BRAC Budget Commission. All ideas will be reviewed. Some may be forwarded directly to agencies for further research and others may become part of the BRAC agenda. You will not receive any further response from the Commission. If you have a question that requires a response from the Governor’s Office please visit the Governor’s homepage.
8.5.09 – Update – Thanks to everyone for your efforts. Unfortunately the Affiliate Tax passed in NC today. Our only hope now is to wait until the state realizes that they’ll in fact lose money on this move, and wait for them to repeal the law. Meanwhile, those in other states where this litigation may be pending – don’t wait! Act now before it’s too late.